AUD/JPY dips below 96.00, geopolitical optimism limits downside

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AUD/JPY offers its recent gains from the previous session, trading around 95.80 during the European hours on Tuesday. The currency cross depreciates as the Australian Dollar (AUD) remains subdued despite an improved Westpac Consumer Confidence.

AUD/JPY may regain its ground amid positive signals of a potential Ukraine-Russia resolution.
The AUD weakens as persistent consumer pessimism may necessitate further policy easing.
The Japanese Yen gains support on expectations of a potential interest rate hike later this year.

The reading climbed 5.7% in August to 98.5, following a 0.6% gain in July, marking its highest level since February 2022, as the Reserve Bank of Australia (RBA) has implemented a total of 75 basis points in rate cuts since January.

The AUD faces challenges, as Matthew Hassan, Head of Australian Macro-Forecasting, said the prolonged period of consumer pessimism may be coming to an end, although maintaining momentum could require additional easing. However, Hassan highlighted that policymakers are under no immediate pressure to deliver further cuts.

However, the downside of the risk-sensitive AUD/JPY cross could be limited amid easing risk sentiment, driven by positive signals toward a possible resolution of the Ukraine-Russia war. US President Donald Trump and Ukrainian President Volodymyr Zelenskyy both hoped that Monday’s gathering would eventually lead to three-way talks with Russian President Vladimir Putin.

The Japanese Yen (JPY) finds support after the Bank of Japan (BoJ) raised its inflation forecast at the July meeting and signaled the possibility of an interest rate hike later this year. Adding to the momentum, Friday’s data showed Japan’s economy grew more than expected in the second quarter, driven largely by net exports despite US tariff headwinds, strengthening the case for a more hawkish policy stance.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.